The Press Enterprise (CA), February 17, 2006

Curb costs by scrapping onerous wage, environmental regulations

Last November, voters approved Prop. 1C, a $2.9 billion bond aimed at increasing affordable housing in California. Though well-intentioned, the bond does not address the manageable factors contributing to the high price of housing in the Golden State. A true solution requires tackling the regulatory cost drivers.

Construction costs have increased, due in part to prevailing-wage laws currently on the books. California's Code of Regulations requires that prevailing wages -- the wage paid in the largest city in the county to a majority of workers in that profession -- be paid to workers on publicly funded construction projects, including nearly all affordable-housing projects.

A study by the California Institute for County Governments found that prevailing wages are typically 36 percent to 55 percent higher than market wages. These higher wages cause higher construction costs, which then result in fewer affordable homes. A 2004 study from the UC Berkeley Program on Housing and Urban Policy estimates that the additional cost imposed from paying prevailing wages ranges from 9 percent to 32 percent.

The study also estimates a loss of more than 2,600 low-income housing units each year from prevailing-wage requirements. Repealing SB 975, the bill that requires the payment of prevailing wages on publicly funded projects, would significantly reduce high construction costs that discourage developers from building more affordable housing.

Another cost driver is environmental regulations, such as the California Environmental Quality Act. Labor unions often use these complex regulations to leverage developers into signing project labor agreements to use only higher-paid union labor in construction, increasing building costs.

Developers often accept project labor agreements in order to avoid endless litigation and red tape challenging compliance with onerous environmental requirements. California Unions for Reliable Energy recently deployed this "greenmail" tactic to prevent the construction of two power plants. Had this been successful, the added costs would have been passed on to consumers in the form of higher electric bills.

"Greenmail" increases the cost of construction and reduces the supply of affordable housing. Housing prices, however, aren't determined solely on the basis of construction costs. A recent study by the National Bureau of Economic Research found that construction costs represent half, or less, of a home's price in high-cost cities.

The remainder is due in large part to zoning regulations that seek to curb development and control growth but force land values to increase. Even inclusionary zoning laws -- requiring a certain share of construction to go to housing for moderate to low-income families -- contribute to the housing shortage.

Inclusionary zoning laws discourage developers from building in areas most in need of low-income housing. In the average city, new construction decreases by 31 percent in the year after the adoption of inclusionary zoning.

Eliminating harmful zoning and growth-control regulations would increase the supply of housing and make prices more affordable. Numerous studies measuring the impact of zoning and growth regulations on prices in California have confirmed this effect. One recent study examining the effect of moving from less-stringent to more-stringent regulations found that rents increased by 9 percent to 26 percent.

The $2.9 billion bond of Prop. 1C won't lower housing costs as long as regulatory hurdles stand in the way. Californians should demand that lawmakers remove these costly, man-made obstructions rather than open their pocketbooks every time there is need for a public bailout. The only practical, long-term solution is to remove intrusive government regulations and let developers help people who need affordable housing.